By DailyFX - US Dollar - 2006 has been a tough year for the US dollar. It lost value against the Euro, Swiss Franc,...

... British Pound and Australian dollar while only managing to end unchanged against the Japanese Yen, Canadian and New Zealand dollars.

Volatility shrank to record lows and the breakout that we saw in late November lasted for no
more than 2 weeks for most of the currency pairs. The US dollar ended the last
trading day of the year stronger against every major currency except for the Euro.
The calendar was very light with only the help wanted index released this morning.
The index remained unchanged and resulted in zero volatility for the greenback. All
markets are closed on Monday while the US stock markets will remain closed on
Tuesday for National Mourning Day (for former President Ford). Futures markets will
be open on Tuesday, but will close early. However, just because the US markets are
closed on Tuesday does not mean that traders should not be prepared for the busy
week ahead. There are a lot of important data set for release including
manufacturing and service sector ISM, the minutes from the last FOMC meeting and
non-farm payrolls. With the EUR/USD and GBP/USD consolidating for most of December,
next weeks data could start the year with bang. Manufacturing ISM is due out
Tuesday. After the strong Chicago PMI print yesterday, we could actually see the
index rebound, especially since the ISM adjusted Philly Fed index increased in the
month December despite the drop in the headline index. Traders will be paying a
very close attention to the prices paid component since inflation is still the
Federal Reserves top priority. Recent economic data has been mixed which means
that the outlook for the economy is still uncertain. The non-farm payrolls report
on Friday should help to clarify things, but in the beginning of the week, the ISM
number will help to confirm or deny whether the manufacturing sector is still facing
recessionary conditions.

Euro - The Euro is up 11.5 percent against the US dollar this year and is the only
currency to strengthen against the dollar in the last trading day of 2006. The
outlook for the EUR/USD is bullish both technically and fundamentally. The latest
rise was sparked by the sharp jump in M3 money supply in the month of November. The
annualized rate of growth hit 9.3 percent, which is the fastest pace of growth since
February 1990. The 3 month moving average rose to 8.8 percent, which is the biggest
gain since May 1990. The rapid growth is sure to raise the eyebrows of the already
hawkish central bankers and will give them an even stronger reason to lift interest
rates in the first quarter of next year. This comes in stark contrast to the US
Federal Reserve who at best will keep interest rates on hold and at worst, will
begin lowering interest rates in the first quarter. The ECB has said loud and
clearly that they plan on continuing to raise interest rates. Just yesterday, ECB
member Mersch reiterated the central banks view that interest rates remain very
low and monetary policy is still accommodative. Like the US, there is a great deal
of Eurozone economic data due for release next week. We are expecting
manufacturing, retail and service sector PMI, along with inflation, unemployment,
and retail sales. Meanwhile in Switzerland, the KoF leading indicator fell more
than expected from 1.75 to 1.60. This confirms the drop in the UBS consumption
index reported earlier this week. Swiss PMI and CPI are due out next week with
potential weakness in both.

British Pound - Like the Euro, it has also been an extremely good year for the
British pound, which has appreciated 13.6 percent against the US dollar. A recovery
in the housing market as well as strong merger and acquisition flows has helped to
drive solid gains in the currency. However, even though the Pounds move beat the
Euro’s this past year, in the last 24 hours, mixed economic data was not enough to
help the currency match the rise in the Euro. Mortgage approvals surged in the
month of November, but mortgage equity withdrawal was lower than expected in the
third quarter. The offsetting reports forced the British pound to fall victim to
overall dollar strength. More housing market data is due out next week along with
PMI indices, money supply and consumer confidence.

Japanese Yen - Even though USD/JPY ended the year basically unchanged from where
it started, the Yen weakened significantly against all of the other majors,
especially EUR/JPY which hit yet another record high on the last trading day of the
year. The main question in the weeks ahead is when will the Bank of Japan raise
interest rates. The JiJi news suggested earlier this week that we could see a 25 or
50bp hike in January. However last night, Nikkei news said that the BoJ will not
rush to raise rates. No one is sure, which is what makes the Yen the biggest at
risk currency in 2007. Economic data has been mixed and does not support a
premature tightening. Consumer prices and consumer spending have been weak. The
Manufacturing PMI survey released last night reported a drop from 53.7 to 53.1 in
the month of December. BoJ Governor Fukui has already said that their decision
remains data dependent. Unfortunately there is no data next week with the Japanese
markets closed until Thursday, which means that Yen traders will need to continue to
wait.

Commodity Currencies (CAD, AUD, NZD) - The Australian dollar ended the year up 7.5
percent against the US dollar, but its other commodity currency peers were not as
lucky. Both the New Zealand and Canadian dollars ended the year basically unchanged
as the commodity boom came to a halt in the summer of 2006. There was some
secondary data from Australia and New Zealand reported overnight. Australia saw
stronger private sector credit growth while New Zealand saw stronger money supply
growth in the month of November. However the real story today was the Canadian
dollar. The currency surged to a fresh 8 month high. With no news on the calendar,
the move was driven primarily by acquisition flows. Canadas Power Corp will be
buying March & McLennan Company's Putnam Investments money-management unit for $3.9
billion. There are some key Canadian data due out next week and light Australian
and New Zealand data.


Kindest Regards,

Kathy Lien
Chief Strategist
Forex Capital Markets LLC
32 Old Slip, 10th Floor
New York, NY 10004
Tel (212) 897-7660
Fax (212) 897-7669
E-mail: klien@fxcm.com

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